© 2005 Dechert LLP Antitrust M&A Developments 2004 – The Year in Review March 11, 2005

© 2005 Dechert LLP

Antitrust M&A Developments

2004 – The Year in Review

March 11, 2005

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Antitrust M&A Highlights

• The government doesn’t always win

• Watch the deals that are not challenged

• Relevant market allegations continue to be very narrow

• Unilateral effects cases require closest substitutes, not just close substitutes

• Customer testimony has its limits

• Flexibility with remedies may increase, but parties must honor their commitments

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Antitrust M&A Highlights

• Ninth Circuit flashes warning light for joint ventures

• Fines for Hart-Scott-Rodino violations are rising but so are reporting thresholds

• Policymaking continues into the second term; more changes ahead

• Senior personnel have changed and others may soon change. Will enforcement change?

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The Government Doesn’t Always Win

• In three significant decisions, the government lost merger challenges:

– United States, et al. v. Oracle Corporation, 331 F. Supp. 2d 1098 (N.D. Cal. 2004) (rejecting DOJ’s market definition, competitive effects analysis and reliance on customer testimony)

– FTC v. Arch Coal, Inc., 2004 U.S. Dist. Lexis 15996 (D.D.C. Aug. 16, 2004) (rejecting FTC’s “novel” theory of “tacit coordination” to restrict output)

– United States, et al. v. Dairy Farmers of America and Southern Belle Dairy, Civ. No. 03-206 (E.D. KY Aug. 31, 2004) (ownership of 50% non-voting interest alone is insufficient to conclude that a reduction in competition is likely) (appeal pending)

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But Overall, the Government Wins More Than They Lose

• To start 2005, the government did win one, albeit in an administrative action with the Federal Trade Commission sitting in review of its own case

– In the matter of Chicago Bridge & Iron Company

• In the aggregate, the federal agencies are batting better than .500 in federal litigated merger cases since 2000 (5 years)

– DOJ prevailed in two of four litigated merger cases

– FTC prevailed in three of four litigated merger cases

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Watch the Deals that are Not Challenged

• DOJ announced a new policy of attempting to explain the decision not to challenge certain deals

• The DOJ policy tracks the FTC practice begun in 2001 with the AmeriSource/Bergen transaction

• These statements provide valuable insight into the Agencies’ thought processes

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Agency Explanations of Decisions Notto Challenge Transactions in 2004

DOJ Explanations

Anthem/Wellpoint Health

Movielink (VOD JV)

UnitedHealth Group/Oxford

Arch Wireless/Metrocall

FTC Explanations

Genzyme/Novazyme

(with dissent and statement)

Caremark/Advance PCS

RJR/Brown & Williamson *

(with concurrence)

Bertelsmann/Sony JV (concurrence)

Victory Memorial/Provena

(with dissent)

*Notable for its detailed application of coordinated and unilateral effects analysis

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Relevant Market Allegations Continue To Be Very Narrow

Arch Coal – 8800 Btu SPRB coal, excluding 8400 Btu SPRB coal, is a relevant market

Southern Belle – school milk in each school district is a relevant market

Evanston Hospital Northwestern Healthcare – northeast Cook County and southeast Lake County comprise a geographic market for hospital merger analysis

Connor Bros. – Sardine snacks, as distinguished from premium sardines and ethnic sardines, constitute a relevant product market

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Unilateral Effects Cases Require Closest, Not Just Close Substitutes

• Chicago Bridge – “This case involves the acquisition of a company by its closest rival in four relevant markets;” emphasis on closest competitor repeated throughout the opinion.

• Oracle - “Plaintiff [in unilateral effects case] must demonstrate that merging parties would enjoy a post-merger monopoly or dominant position, at least in a ‘localized competition’ space;” must be a gap to competing products in the chain of substitution.

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Unilateral Effects Cases Require Closest, Not Just Close Substitutes

• RJR/B&W - Unilateral effects requires “uniquely close competitors.” “There is no market in which, and no brands for which, [B&W] and RJR are each other’s closest competitors.”

• Cingular/AT&T Wireless – parties “are likely closer substitutes for each other than the other. . . providers in the relevant geographic markets.”

• Connor Bros. – acquired company described as “main competitor” to acquiring company; other competitors describes as “fringe” players.

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Customer Testimony Has Its Limits

• Oracle – rejecting opinion testimony of customers relating to product market definition and competitive effects as “largely their preferences;” finds that “unsubstantiated customer apprehensions do not substitute for hard evidence” regarding the costs of alternatives

• Arch Coal – rejecting testimony regarding customer preferences in favor of testimony regarding the ability of customers to substitute and historical patterns of substitution

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Flexibility With Remedies May Increase, But Parties Must Honor Their Commitments

• Most merger enforcement is still by consent decree

• Government expects you to follow through on your commitment; failure may result in fines including reimbursement to the government of the cost of investigating the violation

– Republic Services $1.5 million fine

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Flexibility With Remedies May Increase, But Parties Must Honor Their Commitments.

• Agencies will consider modification of relief where necessary

– Alcan/Pechiney (DOJ)

– Time Warner/Liberty (FTC)

• But range of relief acceptable to the agencies is constrained by FTC and DOJ policy statements

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Ninth Circuit Flashes Warning Light For Joint Ventures

• Pricing by joint venture may be deemed per se unlawful price fixing by venture’s parents when parents “fail to demonstrate a sufficient relationship between the price fixing scheme and furthering the legitimate aims of the venture.”

– Appearance of holding out the parents as independent entities post formation appears to have been a factor

• Dagher v. Saudi Refining Inc., 369 F. 3d 1100 (9th Cir. 2004) (motion for rehearing pending)

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Fines for Hart-Scott-Rodino Violations are Rising But So are Reporting Thresholds

• Misuse of the investment exemption remains the focus of enforcement actions

– Smithfield Foods - $2 million civil penalty for twice violating HSR in connection with purchases of IBP stock

– John Hancock - $1 million civil penalty for violating HSR in connection with purchases of Manulife

– Bill Gates - $800,000 civil penalty for violating HSR in connection with purchases of ICOS, a company for which he was a director

• Good news for filing parties is that statutory thresholds are now indexed to inflation and have been raised 6.2% for 2005

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Policymaking Continues; More Changes Ahead

• DOJ released new policy of explaining, in certain cases, its decision not to challenge a merger

• DOJ released the Antitrust Division Policy Guide to Merger Remedies, which was largely consistent with the 2003 Statement of the FTC’s Bureau of Competition on Negotiating Merger Remedies

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• FTC announced new rules that harmonize (but not equalize) the treatment of corporate and non-corporate entities under Hart-Scott-Rodino

• The Antitrust Modernization Commission announced 25 issues for study, including eight related to mergers

• The EC issued new Horizontal Merger Guidelines indicating greater convergence with U.S. guidelines

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• DOJ and FTC announced intention to create a commentary on the Horizontal Merger Guidelines

• FTC modified its model second request to create a special version for retail industry mergers; suggesting that additional industry-specific models would be forthcoming but none yet

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New Personnel, New Direction? DOJ Antitrust Division

• Tom Barnett, formerly of Covington & Burling, replaces Deborah Majoras as Deputy Assistant Attorney General

• David Higbee is added as Chief of Staff and Deputy Assistant Attorney General

• Ken Heyer is named on an acting basis to replace David Sibley as Deputy Assistant Attorney General for Economics

• Hew Pate has now held the AAG job for over 2 years; how long will he stay?

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New Personnel, New Direction? National Association of Attorneys General

• Mark Bennett (R-HI) takes over as Chair of NAAG’s Antitrust Committee

• Elliott Spitzer (D-NY) becomes Vice Chair

• Trish Connor from the Florida Attorney General’s Office remains chair of NAAG’s Multistate Task Force

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New Personnel, New Direction?Federal Trade Commission

• Tim Muris has stepped down as FTC Chairman and has been replaced by Deborah Majoras

– Muris was a large force on the Commission and on Commission action; explanations of decisions to not challenge mergers clearly bear his mark

– Majoras has promised continuity and appears ideologically compatible with Muris

• Jon Leibowitz replaces Mozelle Thompson

• Commission remains majority controlled by Republican appointees

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• But Chicago Bridge strikes a very different tone

– 104 page opinion by Commissioner Swindle, long regarded as a conservative

– Heavy emphasis on the structural presumption; strength of the presumption regarded as a function of concentration

– Minimal discussion of competitive effects and market circumstances that give rise to adverse competitive effects; closer to a 1984 Merger Guidelines analysis

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• Is Chicago Bridge a new direction or simply a very careful effort to avoid creating precedent that could be used against the Commission in future deals?

– We will be watching this closely and will let you know!

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For more information, please contact:

Paul T. Denis

Dechert LLP

Washington, DC

(202) 261-3430

[email protected]

Michael D. Farber

Dechert LLP

Washington, DC

(202) 261-3438

[email protected]

www.dechert.com282110

Documents

© 2005 Dechert LLP Antitrust M&A Developments 2004 – The Year in Review March 11, 2005